So the nice folks at Harvard Business School publishing invited me to attend the Michael Porter virtual seminar, and very interesting it was too. Porter says that the overall problem is that we haven’t defined health care as the delivery of value to patients. We need to get innovation within the system at the patient level. That’s what he said in his article published back in June (here’s an interview about it as the whole article is sub only), backed up with the version of the article presented in his talk. Most of his criticisms of the system are very familiar to THCB readers. And we mostly agree about what’s wrong.

There was also some new research from Porter’s team discussed in the seminar, which is about how to get “there” from “here”. For example, Porter believes that there is little benefit in broad provider networks, but instead providers they should try to be excellent and unique regionally and nationally. Porter also suggests that providers should consider one bill (as a patient I applaud this!) and organize around one practice area for each disease state. In order to get this team unity potentially hospitals should hire physicians and put them all on salary. In any event providers need to organize themselves surrounding the patient practice areas and move away from procedural functional areas as they are now organized. In addition providers should separate diagnosis and treatment into different functions (Ed note: Isn’t that what managed care tried to do with outside review? Maybe, but with very limited success). What Porter was leading up to is that providers need to be distinctive and have a market niche or brand strategy that’s comparable to other businesses in other industries. He then proceeded to give several examples of providers that have made big improvements by adopting some of these innovative business methodologies.

Porter continually stressed that the local versus regional/national axis is a really important one for providers to focus on, and that excellent providers should expand regionally and manage care on a much wider level. Interesting idea and the branding impact may have some impact, but how can it be a major trend when health care is produced and consumed locally, mostly because people want their services delivered locally? Incidentally, the reason for horizontal hospital mergers was to amass local monopsony power versus strong regional payers. Any hospital backing out of that for some mythical value creation strategy is looking at economic suicide given the current incentives in the market. It’s the Sutter Healths of the world using their market clout to jack up fees and revenue who are doing well!

On the insurance side, Porter believes that health plans should stay independent from providers and should stay in market–he thinks they can “add value”. But not by extending the managed care network control model, which he believes has failed. He thinks health plans will provide value in 3 areas –providing information, helping support consumers and efficient claims processors. But he notes that patients don’t trust their health plans, and that was the political reason for managed care network model’s failure. But the reason health plans went away from the narrow network model is because their customers (plans and employers) asked them to, and were prepared to pay more (the increases of the last 5 years) for those wider networks. And the last 5 years have been very profitable for plans that have gone back to the old ways of picking their risks very carefully.

In my interpretation Porter gave a fascinating lecture about how health care providers might have changed had Enthoven-style managed competition become a dominant force in American health care. Unfortunately for political reasons managed competition didn’t become that force and without the financial incentives, providers didn’t have to change what they did. What Porter says is, thankfully, more coherent than Reggie Herzlinger’s notions about a consumerized system, but everything he says about provider innovation being possible Alain Enthoven said 15 years ago. These include single prices and bills for a lifecycle of care, which sounds a lot like capitation or defined costs for DSM to me! Porter says that health plans need common information protocols, as there are no common standards, and people need to be able to understand the choices they make based on good information. All standard stuff I heard in Enthoven’s lectures in 1990 (and he’d been saying them for more than a decade by then).

But it’s where Enthoven went next was important. He said that to get to the type of innovation Porter wants you’d need a) a significant change to the incentives in the system brought about by tighter (or more accurately) very different regulation of health plan behavior and the insurance market, and b) that consumers needed help from intermediaries to understand what they were buying because it’s too hard for them to figure out the differences based purely on price without understanding outcomes.

In this lecture Porter never got to these points. He managed to talk for 45 minutes about how providers should change behavior without mentioning incentives. I asked a question about why he felt that the system might change in the absence of Medicare or any other big payer pushing a change in incentives. As part of the question I mentioned that the changes he wanted were the same ones that Enthoven’s managed competition would have brought into fruition. Porter was pretty dismissive of managed competition and Enthoven, saying that there was no such thing as competition that could be “managed”, but here he’s just wrong. Any market is bounded by regulation and market players are acting out their rational incentives within that regulatory framework. If the government uses regulation and subsidies to change the market, in one way or another it’s “managing” competition. And governments do this in every market either by deliberate action or by inaction.

Health care is a prime example. The incentives are wrong because the regulation allows them to be. For instance, Porter’s patient-centered value delivery sounds very like disease management to me. So why has DSM failed? Mostly because health plans and payers have competed to get rid of patients from their plans who need that DSM, and because providers haven’t been rewarded based on patient outcomes. The reason that providers are rewarded the wrong way is due to the historical fee-for-service system that was set up by insurers and adopted by government. And that system is still the basis for healthcare incentives. Unless Porter has repealed the laws of economics providers will still, more or less, follow the money.

In the rest of his answer to my question, Porter said that although Medicare is important, we don’t need it to change for the system to adopt his principles. He still thinks that we could have dramatic improvements in care cost and quality and providers can do well doing it, in the absence of policy change (although he grants that it would be helpful). He believes that providers are driving this change, and are integrating their care around practice areas. One of his prime examples (mentioned several times in his talk) was Intermountain Health Care. You’ll get no argument from me that they are doing great work. Unfortunately historically very few organizations have been copying them. Intermountain had the luxury of a wealthy benefactor–the Mormon Church–insulating it from market incentives and helping it get set up to do the right things, such as comprehensive care management, reducing medical errors, and cutting waste by getting procedures right the first time. More importantly they have been leaving money on the table by doing that!! Their quality guru, Brent James said so himself on the front page of the NY Times last year, and Michael Millenson wrote much more on the providers who “got quality too early” to their own fiscal detriment in his book “Demanding Medical Excellence”.

Porter thinks that we don’t need to wait for public policy, although some of the changes he advocates are sensible like a move to a defined benefit package along the FEBHP lines (something again from Enthoven c. 1985). But Porter said loud and clear that everyone in health care should move in the direction he advocates even without regulatory change and would do better financially by doing so. While they might follow his lead, it is extremely unlikely whether the typical provider or plan would benefit from doing so.

Instead of looking at the big-name outliers and assuming that they’re the ones who are going to do well, Porter needs to realize that it’s the mass of American physicians and hospitals who are going to have to change for the overall patient experience to change, and they have no incentives to do so. When, as Wennberg shows us, providers in Florida are practicing on patients at three times the rate as those in Minnesota, there’s a reason for it. They get something like three times the money!

There are ways out of this, and to be fair Porter mentions them in his paper, even if he belittled them in his talk. Putting Medicare into a Pay for Performance mode is one important element, Changing regulations governing the insurance system so that health plans are rewarded for better handling of the treatment of sick patients is another. But HSAs and Association Health Plans are pushing incentives in the opposite direction, and the Medicare P4P movement is very, very nascent. Porter seems to think that the system can change itself. As the old joke about the light bulb and the psychiatrists goes, the system has to want to change. And right now it doesn’t. And there’s $1.5 trillion worth of political influence to stop the reforms needed to make it change.

I think looking back in 10 years Porter’s ideas may share Enthoven’s fate. He’ll be wondering why no one paid attention given that the solutions were so obvious. Unfortunately this is typical of a really bright person entering health care from another perspective and being totally bewildered by the ferocity of the political reaction they’ll get. Porter comes from the rarefied air of international business, but this also happened to Enthoven even though he was one of Macnamara’s whiz kids at Defense Dept in the 1960s.

For now Porter will raise some fuss on the conference circuit, and these ideas may be fad of the month at hospitals, just as integrated delivery systems were 10 years ago. But unless he wants to go to Washington and explain how public and private payers need to change their incentive structures and get the lawmakers to agree over the interests of their campaign contributors, few of the provider-specific innovations that we all agree are needed to promote value in health care will survive in the current market.

There’s a not bad description of the different proposals from Bush (what there is of one) and Kerry about health policy from the AMA News this week. It gets it about right on several of the key points, not the least of which is that Kerry’s plan is unlikely to get past the current Congress even if he is elected, but that Bush’s plan does nothing for the uninsured. It also ends with the fact that people are likely to vote about what is best for their health care rather than for the healthcare system as a whole. That’s a sensible point, although (tangent warning!) in the last 24 years the Republicans have managed to get people to favor tax cuts that (for most people) actually hurt themselves while favoring the 2% of the population that earns more than 5 times the national average household income. (OK, OK I know it’s complicated but if you factor in the benefit of mortgage and health insurance tax deductions to high earners, the increase in social security and Medicare taxes over the past 2 decades, and the increase in state taxes and charges for things like education to cover the reduction they are getting from the Federal pie as that gets diverted to paying interest, then it’s true).

Alright. Back on message (I’d never make a Republican, would I?). There are a couple of issues that the article does have wrong. It quotes an administration official in this section:

Bush favors establishing a monetary cap on damages for pain and suffering as part of a larger package of tort reforms that also would ease liability concerns for other industries. “HHS came out with a study that said we waste between $60 billion and $108 billion because of frivolous lawsuits, that this is money going out of the system, not to take care of patients, but to pay off personal injury lawyers,” Hauck said. “The president has a proven, common-sense medical liability reform proposal that has worked in the states.” Campaign officials argue that capping awards will discourage trial lawyers from filing meritless lawsuits that are blamed for driving up liability premiums.

Well unfortunately that number is flat wrong. The $60-108 billion number is from a paper by Mark McLellan (amazingly enough now CMS head) and that’s his estimate of the cost for the “defensive medicine” practiced by doctors who are scared of lawsuits. The actual cost of the lawsuits including settlements is around $4 billion, which is just a rounding error on a $1.5 trillion system. The trial bar-hating Republicans and their fellow-travelers in the AMA argue that if we get rid of the law suits, we’d get rid of the costs. Unfortunately, there are two reasons for defensive medicine. The first and much more minor is the fear of lawsuits. The second is that those in the system who do all the medicine associated with that “dee-fense” gets paid for doing it! There’s no evidence that anyone in the system (especially not AMA members) wants to get paid less, so the chances of actually saving $108 billion are about zilch — it’s a canard.

The other area that requires fisking here is the AHP concept. The article correctly says that:

Bush would like to see association health plans regulated by the federal government instead of the states. His proposals are expected to reach an estimated 2.1 million uninsured Americans at a cost of $90 billion over 10 years. But Bush faces some stiff opposition to his proposals. “Association health plans [are] the only policy that I’ve seen in the history of mankind that uniquely brings together governors, insurers, insurance commissioners, providers and consumers against the policy,” Jennings said. (Jennings was a senior White House health policy adviser during the Clinton administration). Those groups have complained that AHPs would destabilize the insurance market and actually raise premiums.

The issue is that AHPs are usually prevented by state law from cherry picking the best risks. For example in California we have a law that says that if you’ve had health insurance for the previous 6 months you can’t have a pre-existing condition excluded from coverage (you can though pay through the nose to get that coverage, BTW). At the moment an AHP has to obey that law. If Bush has his way, it won’t have to, which will leave the rest of the plans covered by the state law entering that insurance death spiral where the healthy people all bolt for the newly cheap AHP. And of course the additional costs incurred by the plans staying under state law will end up meaning that they rise their premiums — so that the net result may be that we end up with more rather than fewer uninsured. That’s why the current coalition mentioned by Jennings is so opposed to them. However, in any event it’s a modest change in the overall system. Meanwhile the AHPs might as well be called the Any Heist Plan, so frequent is fraud and abuse in them and their predecessors the METs. However, even if they weren’t fraudulent and made health care insurance cheaper, it’s totally disingenuous to say that they’d reduce uninsurance more than marginally. So for Bush to say that he has a commonsense plan for spreading insurance and reducing health care costs is, as you might suspect, another canard. But then again, who’s going to stop him saying it?

On the other hand Jacques Sokolov has a couple of interesting things to say about Kerry’s plan.

“Sen. Kerry believes that there will be significant savings over 10 years in the adoption of these advanced technologies, to the tune of approximately $200 billion,” Dr. Sokolov said. “Many people think those numbers won’t go very far in Congress because they’re unrealistic.”

The same thing applies here as in defensive medicine. That $200 billion is someone’s income and they don’t want it to go away! Sokolov sums it all up by saying:

Both campaigns are offering valid approaches; it just depends on your perspective, Dr. Sokolov said. “If you were an individual who fundamentally believed that there should be less government intervention in health care, you would be very much focused on the President Bush perspective. If you felt you wanted to enfranchise 26 million more people because we don’t have affordable health care in this country, you’d embrace the Kerry proposal,” he said.

In other words, on this like on so much else, we’re a nation divided between a dogmatic supposed “free-market” ideologue and a wishy-washy centrist who wants to use a third-way public-private approach to fix a problem that has only been fixed elsewhere in the world by massive regulation and intervention.

Meanwhile, as for now the recent Bob Blendon article in the NEJM last week showed health care is only fourth on the list of things voters worry about — but it’s just behind terrorism (Iraq and the Economy top the list). So whoever wins and whatever passes, the American health care crisis — high costs and high uninsurance — will make a return visit at the time of the next recession; say in time for the 2012 election?